Private Mortgage Insurance

On July 29, 1998, the Homeowners Protection Act ("HPA") was signed into law. The Act, which becomes effective on July 29, 1999, provides for mandatory termination of private mortgage insurance when the homeowner's loan balance declines to 78% of the original property value. The "original property value" is the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value when the transaction was consummated. The HPA applies to a purchase loan, initial construction loan or refinancing of a loan secured by the borrower's principal dwelling.

In many cases, mortgage loan applicants are unable to come up with down payments large enough to qualify for conventional loans without some kind of mortgage guarantee insurance. Lenders normally do not require private mortgage insurance if the applicant is able to make a 20% down payment towards the purchase price of the house, giving the lender a loan to value ratio of 80%. When the borrower makes a down payment of lesser value, the lender most likely will require private mortgage insurance.

It is believed that 40% of new homeowners buy private mortgage insurance and that many or most of those insurance policies are terminated by the lender once the loan balance is reduced enough to provide sufficient equity in the house. However, that has not always been the case, especially if the borrower never thought to request that the policy be terminated. Federal law now requires that, unless the creditor pays for the insurance or the loan is a high-risk loan (based on Fannie Mae and Freddie Mac guidelines), the lender must terminate the policy:

At the borrower's request if the loan to value ratio reaches 80% and the borrower Has a good payment history.
- Provides evidence that the property's current value has not declined below the original property value (e.g., with a new appraisal).
- Submits an insurance termination request in writing.
- Has equity in the property that secures the mortgage, which is not encumbered by a subordinate lien.
When computing the loan to value ratio, the loan balance used is based solely either on the initial amortization schedule or on actual payments, at the Mortgagor or borrower's option. The property value used to calculate the loan to value ratio is the original property value. This provision does not apply to certain high-risk mortgage transactions.
If the loan balance is scheduled to decline to 78% of the original property value, based solely on the initial amortization table provided to the borrower at settlement, and the borrower is current on payments. This provision does not apply to certain high-risk mortgage transactions.
At the half-life of the amortization period of the loan if the borrower is current on payments, even if the loan is a high-risk mortgage.

The HPA does not apply to existing mortgages, although disclosures to all borrowers are required annually, notifying them that they may be able to cancel their insurance. New borrowers also must receive disclosures at settlement, which include an amortization table, instructions that explain procedures and documentation requirements for requesting cancellation of mortgage insurance, and the date on which the insurance will be canceled automatically. No regulator has been given rule-making authority to implement this law. However, the agencies do have clear enforcement authority.

The HPA preempts state law requirements regarding the obtaining or maintaining of private mortgage insurance, disclosure of information and various other provisions addressed by the HPA. However, the HPA does not supersede protected State laws, except to the extent that protected State laws are inconsistent with any provision of the HPA, and then only to the extent of the inconsistency. A "protected State law" is not inconsistent with the HPA if it essentially provides more favorable protections to the borrower, such as by requiring more information to be disclosed than is required by the HPA. A protected State law is one that meets all three of the following conditions:

Addresses private mortgage insurance in residential mortgage transactions.
Was enacted not later than July 7, 2000.
Is a law of a State that had in effect, on or before January 2, 1998, any State law regarding any requirements relating to private mortgage insurance in connection with residential mortgage transactions.

Special TILA Warning
Private mortgage insurance premiums are a finance charge under Regulation Z. The regulation requires creditors to include a premium amount in the finance charge that reflects how long the creditor will require the insurance. Although Regulation Z and the Commentary have not specifically addressed this new law, it would appear that lenders will have to determine for Truth in Lending disclosures given before consummation when the loan balance will be 78% of the original appraised value of the property. Once that date is determined, the lender will have to compute the amount of mortgage insurance premiums that the consumer will have to pay, based on that date, and include that amount in the finance charge, APR, and, as applicable, in the payment schedule.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 1, 2/98